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Advanced Micro Devices Inc. (AMD - Analyst Report) announced that it is supplying custom AMD Radeon HD GPUs to Nintendo's (NTDOY) newly-launched Wii U home consoles. This custom graphic processing unit (GPU) will enable Wii U to support high-definition (HD) video for games.

The Wii U is Nintendo’s first offering with HD graphics. Moreover, this is the first console upgrade by Nintendo in six years since the release of Wii. Gamers appear enthusiastic about the new console, as evident from the fact that Wii U is already sold out in many U.S. stores. Research firm IHS is also optimistic, expecting Nintendo to sell 3.5 million Wii Us in the U.S. this year. Obviously, the success of the Wii U will benefit AMD, which may compensate for its recent poor showing versus Intel (INTC - Analyst Report). AMD and NVIDIA (NVDA - Analyst Report) are the main contenders for discrete graphics sockets, so this may be considered a key win for AMD.

Nintendo launched the AMD-powered gaming consoles just before the holiday season. This makes sense, as the holiday season is usually the time when demand goes up. Sony Corp.’s (SNE - Snapshot Report) PlayStation leads the global console market with 38.8% market share. It is followed by Microsoft’s (MSFT - Analyst Report) Xbox 360 with 34.9% market share and Nintendo with 26.3% share.

The gaming hardware market is currently reeling under competitive pressure from emerging social network sites and competing hardware platforms such as smartphones and tablets. Gamers are switching to these platforms or devices as they also provide free games. Gaming apps are also providing various fun-filled and thrilling games, which are successfully enticing gamers.

A study conducted by DFC Intelligence suggests that the global gaming market is expected to increase from $67.0 billion in 2012 to $82.0 billion in 2017. Further, IDC is expecting that there will be 257 million active consoles worldwide by 2015. These estimates suggest that there are opportunities for gaming companies to increase their stakes.

AMD’s revenues in the third quarter came in at $1.27 billion, down 10.2% sequentially and 24.9% year over year, more or less in line with its revised guidance of a 10% sequential decline (at the mid-point). Revenues were also in line with consensus expectations of $1.28 billion. The Graphics business generated 27% of its sales and was down 6.8% sequentially and 15.1% from the year-ago quarter.

AMD’s shares currently carry a Zacks #5 Rank, implying a Strong Sell rating. Nintendo and Sony carry a Zacks #2 Rank, implying a Buy rating in the short term. Microsoft carries a Zacks #3 Rank, implying a short-term Hold rating.

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